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Manufacturing and its separate stories
Simply Economics - October 20, 2017
By Mark Pender, Senior Editor



Manufacturing reports dominated the week but they showed the split that has been apparent all year, between the strength of private and regional surveys and the mixed results of national data from Washington. We'll look at the differences and trends in the manufacturing data and also at housing which is another sector where readings are no better than mixed. The latest in jobs and inflation round out the numbers that are summed up best by the Beige Book, which also came out in the week, and its general assessment of the economy: modest to moderate.


The economy

Let's first look at Washington's data on manufacturing. Factory orders are publlished by the Commerce Department and their showing over the last 12 months has been favorable but uneven which is due to monthly swings for aircraft orders. Yet the trend, despite weakness in August and July, is above the zero line and climbing. The dollar total is a seasonally adjusted $472 billion for an annual gain of 5.7 percent — which is a very respectable mid-single-digit pace.


Another definitive set of data is the manufacturing component of the industrial production report. This tracks volumes based on a host of inputs and is published by the Federal Reserve in Washington. Momentum was building going into the year but production has since stumbled with four declines in seven months. The message is soft with the trend line under zero. Vehicle output has been a negative though a year-end ramp up to meet hurricane-replacement demand could be a coming plus.


Now let's look at diffusion reports. These are based on small samples, in the low hundreds vs 5,000 in the case of factory orders. And responses are not specific totals but rough month-to-month estimates: Are volumes higher, lower, or unchanged from a month ago? The question asks not the degree of change but the direction of change — and on this question the ISM is pointing with certainty to upward direction whatever its degree. This is an accurate call for factory orders but not manufacturing production.


High diffusion scores simply point to good chances that monthly change will be moving higher, whether sharply higher, moderately higher, or slightly higher. The Empire State index, at 30.2, has been sending the same signal as the ISM. And delivery times in this report slowed abruptly in September and offered an early signal of hurricane effects. Empire State's October data then showed a reversal with delivery times quickly returning to normal.


Timelinesss is in fact the reason that diffusion reports exist in the first place. They're easy to produce, costs are low, samples are small, respondents are dependable and the reports come out weeks if not a month before Washington's data. The Philly Fed was the first of the diffusion surveys to signal strength this year. Its readings are at record levels in 48 years of data. But remember, higher diffusion scores only mean a better chance that hard data will increase. There's no guarantee how much.


Housing also has a diffusion index, the housing market index which which has been very strong. Yet when comparing it to hard data, the results are once again mixed. Two pluses in this week's data were a 2.4 percent rise in single-family permts to an 849,000 annualized rate and a 4.6 percent gain in completions to a 781,000 rate. These will help the housing market. The bad news is sharp downturns for multi-family units where starts, along with permits and completions, are also lower.


Lack of housing supply is one of the negatives in the Fed's Beige Book which warns that low inventories are constraining sales. Existing home sales peaked early in the year and have trended down since, to a 5.390 million rate in September. Here too, single-family homes are doing better than condos. New home sales also peaked early and are down since. New home sales will be a highlight of the coming week with Econoday's consensus calling for a slight dip to a 555,000 rate.


One area of the economy where there's no question of direction is employment which continues to rise. After only brief disruptions from Hurricanes Harvey and Irma, initial jobless claims are at 222,000 for the lowest level in 44 years. The 4-week averages at mid-month October and September (highlighted in the graph) hint at strength for the October employment report. And another of the Beige Books warnings is a new one, that shortages of labor may be restraining economic growth.


But there's still a wildcard in play at least for jobless claims. Puerto Rico continues to show no effect from Hurricane Maria. Claims in the territory initially fell, not rose, following the hurricane and, at 1,820 in the latest week, are only slightly above where they were before the storm. Broken roads and communications may well be keeping this total low. In contrast, claims in the Virgin Islands spiked quickly following Maria. Note that neither territory are counted in the payroll data of the monthly employment report.


We end on a bit of a dark note and that's inflation expectations. Year-ahead expectations are down in the business sector as tracked by the Atlanta Fed, falling to 1.8 percent. And a nose dive is also underway for year-ahead expectations in the consumer sentiment report, down 3 tenths to 2.3 percent. Thinking that prices will remain flat will not speed up anyone's spending plans and, on the employment side, may perhaps make workers complacent and content with small gains.


Markets: It can't go any higher, can it?

Stocks moved sharply higher all week breaking closing records along the way. The Dow, at 23,328, rose 2.0 percent in the week and is up 18.0 percent so far this year. The more the bears say the market is overpriced, the higher the market goes. Yet it is true that records are coming at a time when the Fed is lifting rates and just beginning its withdraw from the bond market. The Fed may not want to burst anyone's bubbles but asset prices, and whether they're too high, could be a topic at the month-end FOMC.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 13-Oct-17 20-Oct-17 Change Change
DJIA 19,762.60 22,871.72 23,328.63 18.0% 2.0%
S&P 500 2,238.83 2,553.17 2,575.21 15.0% 0.9%
Nasdaq Composite 5,383.12 6,605.80 6,629.05 23.1% 0.4%
Crude Oil, WTI ($/barrel) $53.71 $51.36 $51.66 -3.8% 0.6%
Gold (COMEX) ($/ounce) $1,152.50 $1,305.90 $1,282.60 11.3% -1.8%
Fed Funds Target 0.50 to 0.75% 1.00 to 1.25% 1.00 to 1.25% 50 bp 0 bp
2-Year Treasury Yield 1.21% 1.51% 1.57% 36 6 bp
10-Year Treasury Yield 2.45% 2.28% 2.38% -7 10 bp
Dollar Index 102.26 93.08 93.73 -8.3% 0.6%


The bottom line

The economy is chugging along but there may be signals that demand for labor may be outstripping the supply of labor. This was the message several weeks back from the wage spikes in September's employment report and one repeated in the latest week by the Beige Book. Would the hard data on manufacturing and housing be higher if not for labor shortages? Caught between the need for labor and the lack of labor, the economy may be facing a new headwind.


Week of October 23 to October 27

The week ends on Friday in style with the first estimate for third-quarter GDP, but it also includes durable goods orders on Wednesday which is a report where strength may be building from within. Housing will be the week's sector theme including new home sales on Wednesday, a report that has been soft, and pending sales of existing homes on Thursday, a report that has been very soft. Advance data on net export and inventories along with jobless claims could make for bumps on Thursday. For GDP, Econoday's consensus is a solid 2.5 percent.




National Activity Index for September

Consensus Forecast: -0.10

Consensus Range: -1.70 to 0.09


Hurricanes scrambled September's economic data pointing to uncertain results for the national activity index. Employment was sharply mixed with payrolls posting a rare decline while at the same time the unemployment rate and wage data showed strength. Retail sales soared on replacement demand for vehicles while the manufacturing component of the industrial production report posted no better than a marginal increase. Forecasters see national activity coming in at minus 0.10 in September vs minus 0.31 in August though the range of estimates is wide, from minus 1.70 to plus 0.09.




PMI Composite for October, Flash

Consensus Forecast: 54.8

Consensus Range: 54.3 to 55.1


PMI Manufacturing for October, Flash

Consensus Forecast: 53.4

Consensus Range: 52.7 to 54.0


PMI Services for October, Flash

Consensus Forecast: 55.2

Consensus Range: 54.9 to 55.6


Markit Economics' set of U..S. indicators was mixed in September but continued to indicate solid overall growth. The composite index slowed 5 tenths to 54.8, a level that is comfortably above breakeven 50. The services PMI has been the leading strength though this index did slow to 55.3 in September with Econoday's October call at 55.2.  The manufacturing PMI, in sharp contrast to other private data on the factory sector, has been the soft, coming in at 53.1 in September with forecasters looking for 53.4 in October's flash. The composite index is expected to hold unchanged at 54.8.


Richmond Fed Manufacturing Index for October

Consensus Forecast: 20

Consensus Range: 15 to 20


Like other regional surveys, the Richmond Fed's manufacturing index has been running at unusually strong levels. September's 6 point jump to 19 easily beat Econoday's high estimate with the report's details showing robust levels for shipments and extended strength for hiring. The October consensus is for a 1 point rise to 20.




Durable Goods Orders for September

Consensus Forecast, Month-to-Month Change: 1.0%

Consensus Range: 0.3% to 2.3%


Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.5%

Consensus Range: 0.1% to 1.0%


Durable Goods Orders, Core Capital Goods (Nondefense Ex-Aircraft)

Consensus Forecast: 0.5%

Consensus Range: 0.0% to 0.6%


Durable goods growth has been steady and moderate with one special highlight and that's improvement for capital goods. Vehicles were another a highlight of the August report with replacement demand a possible key plus for September. Econoday's consensus for durable goods orders is a 1.0 percent gain on top of August's 2.0 percent jump. Ex-transportation orders are seen up 0.5 percent with core capital goods orders also up 0.5 percent.


FHFA House Price Index for August

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.1% to 0.5%


Appreciation in home prices has been perhaps this year's best economic story, running at roughly a 6 percent annual rate and giving an important lift to household wealth. Yet appreciation has been slowing in recent months in line with weakness in home sales. The FHFA house price index managed only a 0.2 percent monthly gain in July with the rate expected to rise to 0.4 percent in August.


New Home Sales for September

Consensus Forecast, Annualized Rate: 555,000

Consensus Range: 540,000 to 590,000


New home sales have been the leading strength of the nation's housing sector despite slowing steadily through the year. Hurricane effects were evident in the South during August though other regions also declined. A positive in the data was a rise in supply which has been low and limiting buyer choices and sales along with it. Completions of single-family homes were up in September which will be a plus for this report. The consensus for September new home sales is for a 555,000 annualized rate vs 560,000 in August.




International Trade In Goods for September

Consensus Forecast, Month-to-Month Change: -$64.0 billion

Consensus Range: -$65.6 to -$63.0 billion


The goods deficit in September is expected to widen to a consensus $64.0 vs $63.3 billion in August ($62.9 billion initially reported). Exports of consumer goods and vehicles as well as capital goods posted solid gains in August. Also released with the report will be advance September data for both wholesale inventories and retail inventories which, like net exports, are also GDP inputs.


Initial Jobless Claims for October 21 week

Consensus Forecast: 235,000

Consensus Range: 230,000 to 240,000


Hurricane effects have completely eased from initial jobless claims which hit a 44-year low in the prior week at 222,000. Yet Puerto Rico is still an unknown given low levels of claims still coming out of the territory. The consensus call for the October 21 week, at 235,000, sees only a limited increase and no major Puerto Rican effect.


Pending Home Sales Index for September

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: -1.9% to 1.9%


Pending sales, which track initial contract signings for resales, have been accurately forecasting this year's steady weakness in the existing home sales report where final sales are tracked. Weakness in August pending sales included the hurricane-hit South but other regions were soft as well. After August's surprisingly sharp 2.6 percent drop, the Econoday consensus for the September pending sales index is a gain of 0.5 percent.




Real GDP: 3rd Quarter, 1st Estimate, Annualized Rate

Consensus Forecast: 2.5%

Consensus Range: 1.9% to 2.9%


Real Consumer Spending, Annualized Rate

Consensus Forecast: 2.2%

Consensus Range: 1.8% to 2.7%


GDP Price Index

Consensus Forecast: 1.6%

Consensus Range: 1.5% to 1.9%


Third-quarter GDP is expected to slow to a still respectable 2.5 percent annualized rate from the second quarter's very solid 3.1 percent. Consumer spending, seen at 2.2 percent vs 3.3 percent in the prior quarter, was mixed in the third quarter but will get a lift from vehicle replacement demand following Hurricanes Harvey and Irma. Business investment appeared solid but could soften from prior strength with net exports likely to contribute to growth. The GDP price index is seen rising to a 1.6 percent rate vs 1.0 percent in the second quarter.


Consumer Sentiment Index, Final October

Consensus Forecast: 101.1

Consensus Range: 98.0 to  103.5


The consumer sentiment index burst higher in mid-month October to 101.1 for the best showing in 13 years. Full employment is a main factor boosting confidence while low rates of inflation are helping purchasing power. Inflation readings in this report have been unusually weak, at only 2.3 percent for the year-ahead outlook. Despite a wide range of estimates, Econoday's consensus is for no change in final October, at 101.1.


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